Health care consumes a large and growing chunk of rich countries' income, but does it provide value for money? Paul Wallace investigates

HIS financial empire made him the equal of kings, his fortune was the envy of the merely rich. But in the summer of 1836, Nathan Rothschild was dying of an abscess leading to blood-poisoning, and all his wealth was to no avail.Today, a dose of antibiotics, costing a few coins, would have saved the 59-year-old banker. What would he have been willing to pay for that prescription?

To the seriously sick, effective medical care is priceless. But not everyone who goes to the doctor is gravely ill, nor is all health care effective. Yet someone has to foot the bill, whether or not the health care works or is really needed. Individuals' demand for medical care is potentially boundless, but the collective systems that fund most health care must impose limits. That contradiction is a growing problem for rich countries as costs spiral upwards.

In America, publicly financed health care goes mainly to the old and the poor; most American workers and their families are insured privately through their employers. But after a welcome period of restraint during much of the 1990s, the cost of these employer-funded benefits has been rising at double-digit rates in the past few years. Alain Enthoven, a health economist at Stanford University who has pioneered cost-control strategies, paints a scenario in which a continuing cost explosion opens the door for a government takeover of employer-financed health care after the 2008 presidential election.

That would move America's mixed-funding arrangements—which leave 44m people without health-care cover—closer to the Canadian model, in which taxes finance the free use of hospitals and doctors for all. Yet even Canadians have been losing faith in a system that was once a source of national pride. In 1988, some 60% of Canadians thought their health system worked well, but by 2002 only 20% did, and a big majority thought that a fundamental shake-up was needed. Health care was the biggest issue in the recent general election.

Several European countries finance health care mainly through compulsory contributions from employers and employees. This social-insurance model, pioneered in Germany by Otto von Bismarck in 1883, has proved vulnerable to a combination of rising health-care costs and a shortfall in contributions resulting from high unemployment. But reforms in Germany and France to try to reduce the deficits have proved unpopular.

Pressures on national budgets are also causing international tensions, particularly over the pricing of pharmaceuticals, which are consuming a growing share of the total health-care bill. Prescription drugs are generally much more expensive in the United States than in Canada or Europe, where government-dominated health-care systems are able to extract bigger discounts. Tommy Thompson, the American health secretary, says this means his country is shouldering much of the cost of pharmaceutical research, and has asked the Europeans to pay more.

Medical tithe

Already, health-care spending on average swallows up nearly a tenth of GDP in rich countries, and that proportion is rising steadily (see chart 1). Looming ahead are further expenses as the post-war baby-boomers get older and are likely to need more health care. In America, long-term projections by the Congressional Budget Office indicate a steep rise in federal-government spending on health care for the elderly through Medicare. In 2003, this accounted for 2.4% of GDP, but the CBO's central forecast shows it rising to 8.3% by 2050, partly because under new legislation Medicare will have to pick up a sizeable chunk of the cost of prescription drugs for older people from 2006.

Looking on the bright side, there is now much clearer evidence that medical care pays off in healthier and longer lives. That link was once questioned—Mr Rothschild's experience notwithstanding—because international comparisons showed no clear relationship between the resources devoted to medical spending and measures such as life expectancy. But more detailed research into specific conditions such as cardiovascular disease has established that the benefits of medical treatment may handsomely exceed costs. William Nordhaus, an economist at Yale University, has estimated that the welfare gains from higher life expectancy in America in the second half of the 20th century almost matched those from higher consumer spending on things other than health.

Does this, then, provide a licence to cure at almost any price? Hardly. Along with the research establishing the benefits from medical treatment has come other research showing up the waste, inefficiency and poor quality of much health care. Reports published by America's Institute of Medicine have documented a distressingly high rate of medical errors in hospitals, which may cause as many as 98,000 deaths a year—far more than those caused by road accidents. There was “abundant evidence that serious and extensive quality problems exist through American medicine, resulting in harm to many Americans”. The blunt conclusion: “The costs of waste, poor quality and inefficiency are enormous.”

Evidence from other countries suggests that they suffer from similar problems. The medical sector has been slow to invest in information technology, which holds great potential to reduce errors and improve efficiency and quality. Health care is poorly co-ordinated, which is a particular drawback for the growing number of patients with chronic conditions requiring sustained rather than occasional medical care. Effective integration of services provided by primary-care physicians and hospitals is still all too rare.

All this suggests that the system reflects the priorities of providers—doctors and hospitals—rather than consumers, and that there is plenty of scope to push for a better bargain from the huge amount of money now spent on medical care. The central goal for policymakers in the developed world, says the OECD in a recent report, “Towards High-Performing Health Systems”, is to raise efficiency and to get more value for money in medical care.

But the health-care system is resistant to reform. A simple clampdown on expenditure—the usual strategy—contains cost pressures for a while, but they usually resurface as the public clamours for more money to remedy the shortcomings caused by the restraint. Whether cost containment takes the form of budget caps or price controls, it leaves the structure of health care and the underlying power of providers intact. Empowering the consumers of medical care is hard because so much of it is bought indirectly through insurance. Health-care insurers typically respond to increased competition by trying to select the best risks rather than by driving down costs among providers. Getting consumers to pay a bigger share of the cost is likely to make the health-care market work better, but there are limits to the amount of risk that most individuals can shoulder, and to their ability to bargain effectively with doctors and hospitals.

The best hope for successful reform lies in making it easier for health-care insurers and group purchasers to bear down on providers directly. Until now, they have been handicapped by a lack of information about the quality of medical provision. But that is about to change, thanks to a number of important initiatives to set out quality standards and to measure the performance of doctors and hospitals against them.

There is also plenty of scope to introduce more competition into the provision of medical care. In Britain, the government-run National Health Service has awarded contracts for some routine operations (such as hip replacements) to foreign health-care groups. The volume of work will initially be quite small, but the entry of new providers has already administered a salutary shock to a service long shielded from effective competition. Similar innovations are being tried elsewhere. For example, Germany is trying to dismantle the barrier that has largely confined hospitals to providing in-patient care.

This survey will examine the cost pressures in health care, mainly in America and Europe, and the value as well as the waste and inefficiency of much medical spending, drawing on new research. On that evidence, health-care services need to be comprehensively re-engineered. The survey sets out what rich countries are doing to get a better return on the huge sums of money being spent on medical care.